Electronics retailer Newegg plans to raise $175 million for an IPO, according to an SEC filing. The online retailer sells IT products, including computer hardware and software; and consumer electronics through its website. In the filing, the retailer says that it has been profitable every year since 2001 and posted sales of $2.1 billion in 2008.
Newegg’s net income increased 55 percent in 2008, to $28.4 million. Sales increased 13 percent to $2.1 billion in 2008, and have just more than doubled since 2004, when sales were $982 million. As a retailer, NewEgg’s's profit margins are slim. It was only 1.4% in 2008. Amazon’s profit margins are around 3.3%, which is double Newegg’s margins. Reaching a 3.3% margin may the best Newegg can hope for. And while Newegg is seeing decent revenue growth, retail is tough, especially when your biggest competition is Amazon.
In the filing, the retailer admits that it is playing in a tough field that’s chock full of other players. Newegg says that there are “intense competitive efforts” directed at them from rivals that have greater financial resources (i.e. Amazon), giving investors no assurance that Newegg will be able to compete against the big guys.
As with any IPO, investors will be looking for growth potential and whether Newegg can expand those profit margins over time. In order to double its profits, it can either double its revenues to $4 billion or double its profit margins to match Amazon’s. Which one is more likely to happen first if at all? Would you invest in Newegg?
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